Court finds for banks in 1st KIKO litigationA Seoul court ruled in favor of banks in the nation’s first ruling in a nearly two-year dispute over the currency derivative called a knock-in, knock-out (KIKO) contract.
The court’s decision is expected to have a wide impact on the remaining 100 KIKO lawsuits.
The Seoul Central District Court yesterday turned down the request by Soosan, a small construction equipment supplier, that Woori Bank and Citibank return profits made from KIKO contracts.
Soosan filed lawsuits against the banks in November 2008, claiming the contracts were invalid since the banks did not thoroughly explain the risk at the time the company subscribed.
Additionally, Soosan argued that the court should rescind the contracts on grounds that they were initially designed to exclusively benefit the financial companies.
The Seoul court said it is difficult to accept the argument by Soosan that the contract was designed exclusively to the banks’ advantage and therefore violated fair trade regulations.
The court said it is also hard to show the banks violated the obligation to thoroughly explain the risk of the contracts since it was difficult to predict that the won would weaken against foreign currency. The court noted that at the time many state-run research institutes predicted the won would strengthen.
On a counter claim filed by Citibank, the Seoul court ordered Soosan to pay 310 million won ($264,500) for canceling its KIKO contract.
A joint committee of companies that suffered from the currency hedging contracts said the ruling would be appealed.
“This is an absurd ruling,” said Oh Soo-taek, of the joint committee. “Although we didn’t expect to win, we thought the court would take a balanced approach. At the time when the small and midsize companies subscribed to the contracts we did so without knowing the actual structure of the product.”
KIKO is a derivative contract designed to reduce potential risk from foreign exchange rate fluctuations.
Under the contracts, exporters could sell dollar earnings at a higher exchange rate to the banks when the currency fluctuates. However, if the foreign currency strengthens against the won to a given limit, the exporters must sell foreign currency at a lower rate, which leads to losses.
Korean exporters flocked to sign up for the contracts between 2007 and early 2008 when the dollar was weakening against the won. However, after the world was hit by the global financial meltdown in late 2008, the dollar’s value shot up against the won. That led to massive financial losses by subscribers who were mostly small and midsized companies heavily dependent on exports.
By Lee Ho-jeong [email@example.com]
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